Unit 8/21/22

What are the three methods of state securities registration?

Notification (filing), coordination, and qualification.

Registration by coordination — when is it used?

When registering with the SEC (federal) and the state simultaneously. Most common for IPOs. Becomes effective at the same time as the federal registration.

Registration by qualification — when is it used?

For securities registered only within one state (intrastate), not federally. The most demanding method; effective when the Administrator so orders.

Registration by notification/filing — who uses it?

Established issuers meeting eligibility (seasoned companies). The simplest method where available.

What must a registration statement include?

Amount of securities to be sold in the state, states where offered, adverse orders/judgments, and the use of proceeds. Effective for 1 year.

Who may be required to file with the Administrator regarding securities registration?

The issuer, any selling security holder, or a broker-dealer.

Name the key exempt securities under the USA.

US government and municipal securities; securities of banks, savings institutions, and trust companies; securities of insurance companies; public utility securities; federal covered securities; nonprofit securities; commercial paper (short-term, high-grade); and securities of Canadian/foreign governments the US has diplomatic relations with.

Why does exempt status matter?

Exempt securities need not be registered, and their advertising is not filed. But the antifraud provisions still apply to everything.

Is a security exempt because it's issued by a well-known company?

No. There is no "big company" exemption. Federal covered status (e.g., NYSE/Nasdaq-listed) is the route, not size or reputation.

What is an exempt transaction?

A transaction exempt from registration and advertising filing because of how or to whom it occurs, regardless of the security involved.

Name the major exempt transactions.

Isolated non-issuer transactions; unsolicited customer orders; underwriter transactions; fiduciary transactions (executor, administrator, trustee in bankruptcy); transactions with financial/institutional buyers; private placements; and pre-organization certificates.

The most-tested exempt transaction?

Unsolicited brokerage transactions — a customer initiates the order without solicitation. The single most common exempt transaction.

Private placement limits under the USA?

Offers to no more than 10 non-institutional persons in 12 months, buyers purchasing for investment (not resale), and no commissions paid on retail sales. (Institutional buyers don't count toward the 10.)

Who has the burden of proving an exemption applies?

The person claiming it. Exemptions are construed narrowly, and the claimant must prove eligibility.

Can the Administrator revoke an exemption?

Yes, for exempt transactions and non-federal-covered exempt securities, by order. But cannot revoke the exemption of federal covered securities or US/municipal government securities.

What is a federal covered security?

A security exempt from state registration under NSMIA — includes those listed on national exchanges (NYSE, Nasdaq) and investment company shares registered under the Investment Company Act of 1940.

What may a state require of a federal covered security?

A notice filing and fees only. No merit review. State substantive registration is preempted.

Strategic vs. tactical asset allocation?

Strategic sets long-term target weights and rebalances back to them. Tactical makes short-term deviations to exploit perceived opportunities, then returns to targets.

What is rebalancing, and what discipline does it enforce?

Restoring the portfolio to target weights by trimming winners and adding to laggards. It enforces buy-low/sell-high.

Active vs. passive management?

Active seeks to beat a benchmark via selection and timing (higher cost, manager risk). Passive tracks an index (low cost, low turnover, tax efficient).

What is the efficient market hypothesis, and its three forms?

Markets price in available information, so consistent outperformance is difficult. Weak form: prices reflect past prices (technical analysis fails). Semi-strong: reflect all public info (fundamental analysis fails). Strong: reflect all info including insider (nothing beats the market).

Which EMH form, if true, undermines technical analysis? Fundamental analysis?

Weak form undermines technical analysis. Semi-strong undermines fundamental analysis.

Buy-and-hold vs. constant-dollar vs. constant-ratio plans?

Buy-and-hold: no adjustment. Constant dollar: keep a fixed dollar amount in stocks, moving excess to/from a safe asset. Constant ratio: keep a fixed stock/bond percentage, rebalancing to it.

Dollar-cost averaging — the effect on average cost?

Investing a fixed dollar amount at intervals buys more shares when low, fewer when high, producing a lower average cost per share than the average price.

Value investing vs. growth investing?

Value: low P/E, low price-to-book, out-of-favor, often dividend-paying. Growth: high P/E, rising earnings, reinvests rather than paying dividends.

What is a contrarian strategy?

Investing against prevailing sentiment — buying what's out of favor, selling what's popular.

What is dollar-weighted vs. time-weighted return?

Dollar-weighted (IRR of the portfolio) reflects the impact of cash flow timing. Time-weighted removes cash-flow timing and measures the manager's performance — the standard for comparing managers.

What does modern portfolio theory emphasize?

Evaluating an investment by its contribution to the whole portfolio's risk/return, not in isolation. The efficient frontier holds the portfolios with the best return for each risk level.

What is the efficient frontier?

The set of portfolios offering the highest expected return for a given level of risk. Rational investors choose from points on it.

What is capital asset pricing model (CAPM) used for?

Estimating an investment's expected return given its systematic risk (beta), the risk-free rate, and the market risk premium.

The CAPM expected return formula?

Risk-free rate + beta × (market return − risk-free rate). Compensates for time value (risk-free) plus market risk taken (beta × premium).

What does the Sharpe ratio measure?

Risk-adjusted return per unit of total risk. (Return − risk-free rate) ÷ standard deviation. Higher is better.

Why use standard deviation in the Sharpe ratio?

Because it captures total risk. Sharpe rewards returns achieved with less overall volatility.

Expected return of a portfolio — how is it found?

The weighted average of the expected returns of its components.

Total return vs. holding period return?

Total return = (income + capital appreciation) ÷ beginning value. Holding period return covers the entire time held, not annualized.

Real return vs. nominal return?

Real return = nominal return − inflation rate. What you actually gained in purchasing power.

Risk-adjusted return — why does it matter?

Raw return is meaningless without the risk taken to earn it. A high return via high risk may be worse than a modest return via low risk.

After-tax return?

The return remaining after taxes on income and gains. Critical for comparing taxable vs. tax-advantaged holdings.

What is benchmark comparison?

Measuring a portfolio against an appropriate index (e.g., S&P 500 for large-cap equity). The benchmark must match the portfolio's asset class to be meaningful.

What is alpha in performance terms (recap)?

Return above or below what the portfolio's beta predicted. Positive alpha = outperformance for the risk taken.

Internal rate of return as a performance measure?

The dollar-weighted return — the discount rate making the NPV of all cash flows zero. Sensitive to the timing of contributions and withdrawals.

What is the risk-free rate typically represented by?

The 91-day US Treasury bill. The baseline against which risk premiums are measured.